Mutual funds have many benefits which the investor can take full advantage of. From potentially becoming passive income to merely being a strong investment to place your savings in, these funds have huge benefits for investors, both young and old.
What is a mutual fund?
Mutual funds are currently the most popular way for investors to make money – as they are easy to understand, buy, and sell.
The bottom line is that buying into a mutual fund is like buying stocks and shares, with the key difference being that you are buying into a collection of shares from different companies.
In simple terms, think of the mutual fund portfolio as being a cake made from many ingredients (different companies), and you buy a slice of the overall portfolio. The top-level investors then do all the hard legwork in making investment decisions and company research, whilst the investor sits back and enjoys the profits.
Often, mutual funds are tied together within a theme. This is through the individual companies each having a particular feature in common – be it that they all come from the same country, or industry.
These themes allow for an investor to take a macro perspective of the world’s situations, and make investment decisions in the broadest sense, whilst leaving the micro decision making to experts.
For example, let’s create an imaginary investor who believes that India is an up-and-coming economy which will take the world by storm. Our investor may be from any country in the world, and may have absolutely no understanding of internal Indian economics.
So, our investor chooses to invest in a mutual fund – and allows the experts in India to make the best decision making for his money.
In this scenario, our investor has the knowledge that he has some influence over his stocks, understanding the overarching modern geopolitics and being sure in his decision. However, he also has the bonus of not having to focus on the individual companies in which to invest.
Mutual funds also are open-ended. This means that it is possible to buy and sell shares with the fund at the drop of a hat, giving a perfect liquid investment for anybody looking to save their money.
What are the advantages of mutual funds?
There are a few key benefits of mutual funds, but notably the simplicity of investment and the diversity they offer.
With our imaginary investor, it was possible to think about the overarching geopolitics and international relations of the modern world, and invest using these core principles. Many investors often find that it is rather easy to define industries which will grow and have a high rate of return – but choosing individual companies can be tough.
Mutual funds entirely remove this issue, and allow for an investor to have the perfect middle ground of understanding, control, and detail.
The professional workers for the mutual fund then spend their professional workweek interviewing companies, looking into the changes in the market of the industry or area. They can therefore make detailed and researched investment decisions, far above the capability of the standard investor.
As this allows for the shares to constantly adapt to the changing climate of each theme, it adapts to the changing times without the investor actively getting involved.
Could anything be more simple than that?
Mutual funds are, by nature, diversified. While tied together by a common theme, the investments are often split across a number of companies. This has huge perks for an investor as it is less likely that a financial crumble of an individual company will tank the investor’s portfolio.
It is a well known fact among the world of investment that diversity is key to long term, sustainable growth, and mutual funds allow for this diversity. Moreover, these mutual funds allow a new investor to have diversity in their investments with only a small amount of cash required.
Shares often seem scary to the first time buyer, and by taking the individual decision making away from the investor, mutual funds often lose their fear-factor. This leaves mutual funds as a greatly accessible and safe decision for the first time investor – no matter what their initial hangups may be.
While the diversity and close-level expert management of mutual funds allows for them to be a reasonably safe investment, everything comes with risk.
As ever with the stock market, it is possible to lose money. If you are afraid of even the slightest risk, then mutual bonds may be the best decision for you. However, if you can watch dips and rises within the stock market and have little qualms – then mutual funds are often a great decision.
A few final words
Mutual funds offer a fantastic option to all investors, and thanks to their highly-regulated industry, it is hard to make a terrible decision. Some mutual funds have consistently had a 12% rate of return, or even more, and this allows for a solid compound interest to your savings.
These high rates of return are incredibly powerful. If a 20 year-old places $5,000 in a mutual fund at 12% growth for 50 years and never touches it, at 70 they will have $1,957,916.98.
That is phenomenal growth.
Whilst admittedly on the more successful side of mutual funds, it is possible and it has happened.
These funds will be a fantastic way through which you can boost your savings and prepare for retirement. Don’t miss out on what these funds have to offer.
Whether brand-new to investing or a seasoned stock market mogul, you should consider investing in mutual funds today.
Guest Post By The All Round Investor
The All Round Investor is a blog designed to help you reach your biggest financial dreams and goals. Through investments, budgeting and careful fiscal decision making, this blog will guide you towards fiscal security.
The blog is designed with the intention of becoming a community through which people from different communities, backgrounds and lifestyles can go to understand the fundamental aspects of finance, improving their financial position.
The blog includes aspects of self-investment, including – but not limited to – the investment into your habits, lifestyle, education and health. This is because it is deemed irrelevant to have thousands of dollars if your overall quality of life is poor.